Can Fortis Inc. (TSE:FTS) Enhance Shareholder Returns Through Strategic Debt Management and Regulatory Tailwinds?

Fortis Inc. (TSE:FTS) operates in a unique sweet spot: regulated utilities with predictable cash flows, but also the need to balance aggressive infrastructure spending with a high debt load. As of June 2025, the company reported CA$33.81 billion in total debt, with a net debt to EBITDA ratio of 6.0 and interest coverage of just 2.4x EBIT [2]. These metrics highlight a precarious financial position, yet Fortis’s disciplined capital plan and regulatory strategy suggest a path to sustainable shareholder returns.

Strategic Debt Management: A Double-Edged Sword

Fortis’s 2025 capital plan allocates $5.2 billion annually to infrastructure projects, including battery storage (e.g., the Roadrunner Reserve 1 project in Arizona) and coal-to-natural-gas conversions at TEP [1]. While these investments align with decarbonization trends and regulatory expectations, they require significant debt financing. The company raised $1 billion in Q2 2025 to repay borrowings and fund capital programs [4], leveraging its BBB+ credit rating from Fitch (stable outlook) to maintain access to favorable financing terms [1].

However, the high debt burden raises concerns. With levered free cash flow negative at CA$2.32 billion over the trailing twelve months [3], Fortis must rely on refinancing or regulatory rate adjustments to service debt. This creates a dependency on regulatory outcomes, which are both an opportunity and a risk.

Regulatory Tailwinds: The Key to ROE Stability

Fortis’s ability to secure allowed returns on equity (ROE) will determine its profitability. In New York, Central Hudson’s joint proposal seeks to maintain a 9.5% ROE and a 48% common equity capital structure [1], while TEP’s Arizona rate application includes a $172 million retail revenue increase and an annual formulaic adjustment mechanism [1]. These mechanisms aim to streamline rate adjustments, reducing the lag between investment and revenue recognition.

Conversely, FortisAlberta’s reduced ROE due to expiring regulatory incentives partially offset Q2 2025 earnings growth [2]. This underscores the fragility of ROE in a regulatory environment where allowed returns can erode without proactive lobbying. Analysts project that successful rate cases in Arizona and New York could stabilize ROE, but delays or rejections would strain margins.

EPS Growth and Analyst Optimism: A Compelling Case?

Fortis’s Q2 2025 EPS of $0.76 (up from $0.67 in 2024) reflects disciplined execution of its capital plan and rate base growth [1]. Year-to-date net earnings of $1.76 per share (vs. $1.60 in 2024) further highlight resilience [1]. Analysts have raised price targets to an average of $72.00 (44.63% upside from the current price of $49.78) [1], betting on the company’s ability to leverage its regulated model and infrastructure investments.

The dividend remains a cornerstone of shareholder returns. With a 70% payout ratio and a 4–6% annual growth guidance through 2029 [4], Fortis’s dividend is supported by its credit ratings and stable cash flows. However, the high debt load could limit flexibility if interest rates rise or regulatory approvals stall.

The Verdict: A Calculated Bet on Regulation and Resilience

Fortis’s regulated utility model provides a defensive edge in a volatile market, but its success hinges on two factors:
1. Regulatory approvals for rate increases and ROE targets in Arizona and New York.
2. Debt management to avoid overleveraging while funding capital-intensive projects.

The company’s five-year plan to grow rate base to $53 billion by 2029 [1] is ambitious but achievable if regulatory tailwinds align. Analysts’ price targets suggest confidence in this trajectory, though the high debt load remains a red flag. For investors, Fortis represents a high-conviction play on infrastructure modernization and regulatory stability, but caution is warranted given the risks of overreliance on external approvals.

Source:
[1] Fortis Inc. Releases Second Quarter 2025 Results [https://www.fortisinc.com/news/news-releases/detail?id=9691]
[2] Fortis (TSE:FTS) Seems To Be Using A Lot Of Debt [https://simplywall.st/stocks/ca/utilities/tsx-fts/fortis-shares/news/fortis-tsefts-seems-to-be-using-a-lot-of-debt]
[3] Fortis Inc. (FTS-PM.TO) Stock Price, News, Quote & History [https://finance.yahoo.com/quote/FTS-PM.TO/]
[4] Fortis Inc. Releases Second Quarter 2025 Results [https://www.fortisinc.com/news/news-releases/detail?id=9691]
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